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My goal is to give you a basic understanding of what stock options are all about without hopelessly confusing you with unnecessary details. I have read dozens of books on stock options, and even my eyes start glazing over shortly into most of them.
Auto-Trade is a service offered by several on-line brokers. Auto-Trade makes it possible for an investor to carry out an options strategy in his own account without becoming an options guru or making all the trades on his or her own.
Never buy a mutual fund unless it is a no-load index fund with the lowest cost structure. (I will tell you where to find it later.)
Most smart people have set up a Roth IRA, 401(k), or other qualified retirement program. For some of them, it may be the only stock market investment they own.
In spite of the odds against winning, many people seem to like to invest in individual stocks – sort of like picking horses at the race track.
The 10K Strategy is my favorite investment strategy. I have used it to make an average of over 50% a year for three out of four consecutive years. I have now added a twist to the strategy so that annual returns might be less than those years but there should be a much higher likelihood of its succeeding.
Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. All the major stock indexes have ETFs based on them, including: Dow Jones Industrial Average (DIA), Standard & Poor's 500 Index (SPX), and Nasdaq 100 Composite (QQQQ).
Learn about some of my favorite stock option resources.
Terry’s Tips carries out an options strategy designed to significantly outperform the market and other conventional investments.
The strategy does not require picking the right stocks or timing the market. It primarily trades options on the S&P 500 (SPY) and can be used in an IRA.
As
its ticker symbol implies, Salesforce.com (CRM) provides cloud solutions for
customer relationship management needs. CRM reported earnings in late August
that blew away expectations on both the top and bottom lines. The report was
met by the usual round of target price increases that reached as high as $340
(CRM closed at $260 on Friday).
The
stock gapped higher after the report and extended as much as 5.5% higher the
next day, eventually closing with a 2.5% gain. But the shares then sagged,
joining the rest of the market in the early-September swoon. In fact, CRM fell
more than 8% from its post-earnings high.
But the shares appeared to find a bottom last week, thanks to the support of the 50-day moving average. Since turning higher in May, the 50-day has supported pullbacks in July and August. CRM has been stepping higher since a low in early March, putting in a series of higher highs and lows in a rally that has covered nearly 30%. This trade is relying on this trendline support holding for the next six weeks, as the short 250 put of our credit spread is just below the 50-day.
Buy to Open CRM 29Oct 245 put
(CRM211029P245)
Sell to Open CRM 29Oct 250 put (CRM211029P250) for a credit
of $1.10 (selling a vertical)
This credit is $0.02 less
than the mid-point of the option spread
when CRM was trading at $260. Unless the stock rallies quickly from here, you
should be able to get close to this amount. Your commission on this trade will
be only $1.30 per spread. Each spread
would then yield $108.70. This trade reduces your buying power by $500 and makes
your net investment $391.30 ($500 – $108.70).
If CRM closes above $250 on October 29, both options will expire worthless and your return on the spread would
be 27% ($108.70 / $391.30).
Going Once, Going Twice … Sold on CPRT
Copart (CPRT) provides online auction and vehicle remarketing services in the U.S. and several other countries. On Wednesday, the company reported Q4 earnings that easily beat on the top and bottom lines. Used car prices are soaring and CPRT is positioned perfectly to leverage the market. Analysts seem to agree, as CPRT received several target price increases that ranged up to $165 (CPRT closed at $143 on Friday). Despite the positive news, the stock fell as much as 5% on Thursday before closing 2% lower. However, CPRT gained more than a percent on Friday amid a down market.
The stock has been in rally mode since late March, gaining more than 30%. The 50-day moving average has been instrumental in guiding the uptrend, containing pullbacks in May, June and August. The trendline appears to be doing its job again, as it supported this week’s post-earnings drop. This trade is relying on this support holding for the next five weeks as the short 140 put of our credit spread is just below the 50-day.
If
you agree that CPRT will stay above the 50-day moving average (red line in
chart), consider the following trade that relies on the stock remaining above
140 (blue line in chart) through expiration in five weeks.
Buy
to Open CPRT 15Oct 135 put (CPRT211015P135)
Sell to Open CPRT 15Oct
140 put (CPRT211015P140) for a credit of $1.20 (selling a vertical)
This
credit is $0.05 less than the mid-point
of the option spread when CPRT was trading at $143. Unless the stock rallies
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $118.70. This
trade reduces your buying power by $500 and makes your net investment $381.30
($500 – $118.70). If CPRT closes above
$140 on October 15, both options will expire worthless
and your return on the spread would be 31% ($118.70 / $381.30).
Software
developer (QuickBooks, TurboTax) Intuit (INTU) reported earnings on Aug. 24
that handily beat estimates on all fronts. Earnings came in at $1.97 per share,
topping the analyst forecast by 24%, while quarterly revenue of $2.56 billion
beat the estimate by 10%. The company also raised its quarterly and annual
revenue and earnings guidance above expectations. To top it off, INTU raised
its dividend and approved a new $2 billion repurchase authorization.
The
Street clearly loved the report, as the stock was hit with several large target
price increases (one raised the price 27%). The average new target price after
these raises was around the $640 mark, which is 13% above INTU’s closing price
on Friday.
The stock price took the news and target increases in stride, though, with no change on Thursday after the report. On Friday, the stock resumed its huge rally with a 2.4% gain. INTU is up nearly 50% in 2021, with most of that gain coming in the past 3-1/2 months. The shares have been riding along their 20-day moving average, a trendline that has not allowed one daily close below it since mid-May. The 20-day is currently at 541 but should cross above the 550 level in less than two weeks at its current pace. This is also the site of the short put strike of our credit spread.
If
you agree that INTU will continue its rally along the 20-day moving average,
consider the following trade that relies on the stock remaining above 550
through expiration in seven weeks.
Buy
to Open INTU 15Oct 540 put (INTU211015P540)
Sell to Open INTU 15Oct
550 put (INTU211015P550) for a credit of $2.80 (selling a vertical)
This
credit is $0.05 less than the mid-point
of the option spread when INTU was trading at $566. Unless the stock rallies
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $278.70. This
trade reduces your buying power by $1,000 and makes your net investment $721.30
($1000 – $278.70). If INTU closes above
$550 on October 15, both options will expire worthless
and your return on the spread would be 39% ($278.70 / $721.30).
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Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options
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